NQET USD 2022 notes
The Investment Strategy
- Low risk, non-IG paper rated BB-/BB+ (S&P/Fitch)
- Yield to maturity (YTM) of 8%
- Running yield of 5%
- Moderate refinance risk due to sponsor track record and bank appetite for metallurgical coal
- Majority (2/3rds) of coal volumes is metallurgical coal, which faces less immediate ESG challenges than thermal coal
We view the NQET USD 2022 notes as a good opportunity to get into a short-term trade with a high yield to maturity (YTM) and running yield for its rating of BB-/BB+ (S&P/Fitch). In our view, NQET is likely to refinance their USD500m 144A/RegS bond maturing in December 2022. If this was a medium to longer-term trade, we would not have the same degree of conviction.
At this stage, there are still numerous banks out there in Asia, Europe, and the US with an appetite to finance coal-related projects, which give us higher conviction in a short-term refinancing. Favourable thermal and metallurgical coal market conditions will have also made a refinancing more palatable than it would have been 12-24 months ago.
NQET’s sponsor also has a track record of providing support to NQET over the past few years, including funding a settlement by the terminal following a 2020 Queensland Court Action. NQET’s sponsor also recently (May 2021) infused cash to prefund a USD140m debt maturity.
Given the money the Adani family have spent on this endeavour, they’re not going to walk away from this vehicle. What will happen is they’ll likely tip in USD250m and raise USD250m from a bank. Put it this way, since 2015 they’ve injected an aggregate USD700m equity into the vehicle. It’s strategically important to them and the family has large cash pockets.
The majority (2/3rds) of coal volumes is metallurgical coal, which faces less of an immediate ESG challenge than thermal coal. The reason being is that steel is still important in infrastructure and global growth and requires metallurgical coal to be created. Another efficient and effective substitute is currently not available.
North Queensland Export Terminal (NQET), previously named Abbott Point Coal Terminal (or ‘Adani’), has economic ownership of the Abbot Point Coal Terminal in North Queensland under a 99-year lease with the Queensland government.
In addition to its current volume, NQET has an essential role in exporting coal from the greenfield Carmichael thermal coal mine, which is being developed by Bravus Mining and Resources (BMR) – a wholly owned subsidiary of Adani Enterprises Ltd (unrated by all credit ratings agencies).
Adani Enterprises has indicated that Carmichael is due to commence production in Q4 2021. Carmichael will be one of nine users of the terminal and comprise around 20% of NQET’s contracted volumes.
NQET’s credit profile continues to reflect the contractual framework under which it operates, with take-or-pay (ToP) revenues and ability to socialise lost revenue following contractual defaults across other counterparties. Note, the favourable thermal and metallurgical coal market conditions will have placed less pressure on its counterparties and support a short-term refinancing.
Chart 1. Moody's Assumptions Around Thermal and Met Coal Prices
Source: Moody’s Investors Service, FactSet
The majority (2/3rd’s) of NQET’s coal volumes comprise metallurgical coal, which faces less immediate ESG challenges. The reason being is that steel is still important in infrastructure and global growth, requires metallurgical coal to be created. Another efficient and effective substitute is currently not available.
Coal mining and coal terminal sectors have high ESG risks, with risk factors such as declining demand for coal over time as renewables expand and waste pollution rules tighten. These challenges have been reported by certain coal mines and their contractors which have increased refinance risk and obtaining required insurances for production.
Operating conditions for the Queensland coal sector are expected to remain favourable over the next few years, reflecting strong production driven by high prices, which will strengthen the capacity of counterparties to meet ToP charges.
Chart 2. CBA Commodity Price Performance in July 2021
Source: CBA Research August 2021